Consumer banking remains the single biggest operating segment for big American banks like Bank of America, Wells Fargo and Citigroup in terms of both revenue and net income. Generally speaking, other operating segments like investment services, brokerages, wealth management or real estate services come no where close. Yet in myriad ways, these mainstays of consumer banking are being eroded – both by financial services-focused disruptors and by those from outside the industry.

As I discussed in my newsletter last week, the rise of “FinTech” firms is already having a significant impact on the wealth management market. Wealthfront, just as one example, recently announced that it now has $2 billion in assets under management – all in just a little over three years in business. The actively managed mutual fund market is now grappling with how to answer automated services like theirs in a way that preserves their operating margins – and finding that that answer isn’t yet clear.

I think that Wealthfront’s challenge to the mutual fund market is a great example of what’s about to happen in consumer banking. The changes coming to how people will keep and manage their money will have major consequences for the banking industry, obviously, but also for the merchants that consumers do business with. Fortunately, merchants and consumers could be the big winners in the democratization of banking.

Basic Accounts

Interest income is a major revenue driver in consumer banking, which is obviously what makes large depositors particularly valuable for a bank. On the other end of the spectrum, the bank is also able to charge service fees for small accounts, mostly in the form of overdraft and monthly maintenance charges. In this way, it provides a tangible disincentive for those smaller accountholders to remain customers – which is all part of the plan. Given the high costs of maintaining lots of brick-and-mortar locations, most with human tellers, it’s uneconomical to use those resources to serve small accountholders who are unlikely to avail themselves of the bank’s higher-margin products. This is why you’ve seen fee schedules for those services gradually rise over time (now $14/month at Bank of America for a basic checking account!).

Some traditional banks have responded to this market opportunity by pitching online-only banking alternatives that charge no fees. (I’m a customer of Ally Bank, one such example, and been mostly satisfied.) Their significantly slimmer cost structure, enabled by user-friendly web and mobile access points, makes this business model possible. But this still doesn’t really go far enough.

In a 2013 study, the FDIC showed that nearly a third of Americans (106 million people!) are still unbanked or underbanked, meaning that their access to financial services was severely limited. That’s a huge problem, because access to banking services is not only critical to building assets, but is also a prerequisite to establishing credit, including a credit score. The leading reasons cited for being unbanked are also illuminating:

Credit: FDIC National Survey of Unbanked and Underbanked Households. Click for link.

Many, if not all of the top reasons cited here – including “not enough money” – are quickly being addressed by banking innovators using technology. Mobile banking with a free online-only checking account with no account minimum substantially solves most of these issues. While there are a handful of banks doing this today, the opportunity is ripe for more to enter. Like, for example… the world’s largest retailer.

Late last year, Walmart caused waves when it announced its intention to begin offering low-cost checking accounts in a partnership with Green Dot. The new checking account product is called GoBank, and while there is a monthly maintenance fee for accounts below a certain monthly direct deposit total, the fee structure is substantially below that of traditional banks. This comes after Walmart’s abandoned attempt in 2007 to actually become its own bank, which was more or less shouted down by financial industry groups that claimed it would hurt consumers. (Oh, the irony.) Walmart’s core customer base includes many of those who are underbanked today, so providing them with access to affordable financial services could be more in Walmart’s interest than in many banks’.

It’s worth noting, if only by contrast, that two of the U.K.’s biggest retailers, Tesco and Sainsbury’s, operate full-fledged banks offering the full range of consumer banking products, including mortgages and insurance. Same for Carrefour in France. Each is quite clear that their banking arms operate primarily to support their core retail business – something that’s probably infeasible under U.S. regulation.

Accessing capital

The remarkable success of intermediaries like Lending Club in connecting borrowers with “investors” is clear. Like Wealthfront, the numbers are still small today compared to mainstream competitors – Lending Club has “only” about $7.6 billion in loans issued as of Q4 of 2014. Yet for a company barely seven years old, that’s a huge accomplishment, and the growth trend is unmistakable.

Credit: Lending Club. Click for link.

Kickstarter is another example. Their platform has crowdfunded over $1.6 billion for Kickstarter projects, including more than twenty-two thousand projects and $529 million in 2014alone. Many of those projects might never have taken place otherwise, or have relied on inefficiently scraping together funds from friends and family; but many of those projects might also have gone through a traditional bank loan process instead. Indeed, crowdfunding on platforms like Kickstarter is now becoming a feasible option for major business ventures. Pebble, for example, just raised $20 million on Kickstarter for its newest smartwatch.

Peer-to-peer lending and crowdfunding are disruptive business models that are about to steal away huge chunks of revenue from traditional banks. They won’t be right or appropriate for everyone, but younger, higher-income consumers and the most dynamic and innovative businesses will be the likeliest ones to adopt them – which is a big problem, if you’re Wells Fargo. Unlike the legacy banks, these disruptors see nothing but growth ahead of them – because their established competition is either unable, or unwilling, to compete effectively in the same way.

Moving money around

I talked in my last blog post (and in a newsletter a while back) about why I think Facebook is so well positioned to own the payments space. The inherently social and contextual nature of payments make them an obvious, and powerful, addition to Facebook’s platform, and particularly Messenger. As does the fact that, by linking your debit card, they will be free.

A messaging platform with 600 million MAUs is a powerful place to introduce a free way to share funds quickly and easily; even more so when it’s owned by the same company that also owns WhatsApp, which has 700 million MAUs. As Facebook’s payments feature rolls out on Messenger, and extends to businesses who decide to build on the newly announced Messenger platform (and with the new “Buy button”), you have to imagine that it’s only a matter of time before a similar payments functionality is added to WhatsApp. That suddenly makes Facebook into a major competitor with international money transfer companies like Western Union, at the same time as it could begin to resemble a western version of Tmall.

Speaking of ecommerce, of course, there’s something of a scrum going on to offer consumers new ways to pay with their mobile devices, of which Apple Pay is the leader. By making itself the critical intermediary between consumers and the thing they’re buying, Apple has deftly given itself leverage with major banks and card issuers to negotiate a cut of their transaction fees. Eventually, as consumers (or at least the highest-value segments) are more accustomed to paying with their Apple devices than with branded cards, Apple’s leverage to demand concessions will grow.

Responses

The major banks have seen this coming, of course, and have rightly invested heavily in developing their non-consumer-facing business lines. Yet as I said before, this operating segment still represents the biggest slice of revenue and net income at every major consumer bank in the U.S., and it won’t be pretty when those segments suddenly deflate by half or more. (I do wonder if any lonely bank strategy analysts somewhere in Manhattan, Charlotte or San Francisco ever pitched a crowdfunding platform to executives ten years ago and were shot down, because such a product might cannibalize their existing business.)

For merchants, the bigger concerns will be control over the buying experience and credit card transaction fees. As Apple Pay becomes a more mainstream fashion for mobile payment, Apple thus positions itself between the consumer and merchant, disrupting the latter’s full control over their customer’s experience. In a similar way, businesses using the Facebook Messenger platform will never fully own the experience as long as it’s mediated by Facebook. Yet if that’s where the customers are, you can be sure that, eventually, merchants will follow them there.

Ultimately, the democratization of banking services that technology enables will be hugely beneficial to our society as a whole. The whole interconnected ecosystem – between basic banking, lending, payments and commerce – is becoming slowly disintermediated to the extent feasible, which results in more incremental value to each party. Except, of course, the one whose services aren’t as relevant anymore.

Fortunately, that part is always up for grabs – it just depends who moves faster.